Asian Paints Stock Valuation Model and Intrinsic Value

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Let’s delve deeper to find out the intrinsic value of Asian Paints Stock.

About the Company

The company has 50+ years of market leadership in India. They have a dealer network of 65,000+ and are a leader across all geographies except the Kashmir region in India. 

Asian Paints have deeply penetrated the Indian market down to the rural economy where they sell distemper paints, to the automobile sector where they currently have 20% of the total market.

 The major competitors are Kansai Nerolac and Berger paints in India.

These companies, however, have not been able to establish a solid market presence and compete with Asian paints in the organized sector. The company is also focused on R&D and introduces 25 color additions every year.

They also have installed paint dispensing (NNG) machines with almost all retailers which saves them warehousing and encourages retailers to sell Asian Paint products.

From here, we go ahead with Asian Paints Valuation and Intrinsic Value of its shares.

Read more here: Asian Paints Shares Fundamental Analysis 

Methodology Used to value Asian Paints Stock:

Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future.

The following step by step procedure is followed.

  1. Determining the Revenue Growth Rates
  2. Forecasting the Financial Statements
  3. Deriving the FCFF and FCFE
  4. Calculating the Terminal Value
  5. Calculating the Discount Rate
  6. Discounting the Cashflows
  7. Arriving at the Intrinsic Value of the Shares
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Step 1: Determining the Revenue Growth Rates

We arrive at the below table by using the past and expected future performance of both the company and the economy.

This along with adjustments to changes in the management expectations, extraordinary events and other macro factors give the revenue growth rates for Asian Paints Valuation.

Financial Year Revenue Growth Rate
Year 1 5%
Year 2 -2%
Year 3 21%
Year 4 14%
Year 5 13%
Revenue Growth Rates: Asian Paints Stock

Step 2: Forecasting the Financial Statements

The financial statements are forecasted for a period of 5 years using the annual report data of the company. The assumptions used for forecasting are tabulated below.

The Excel model is completely editable and can be adjusted for specific changes that may happen over a period of time.

Financial Statements Forecast - Asian Paints Stock
Financial Statements Forecast: Asian Paints Stock

Step 3: Deriving the FCFF and FCFE

Free cash flow to the firm (FCFF) represents the amount of cash flow from operations available for distribution after accounting for depreciation expenses, taxes, working capital, and investments.

FCFF is a measurement of a company’s profitability after all expenses and reinvestments. It is given as follows.

Free cash flow to equity (FCFE) is a measure of how much cash is available to the equity shareholders of a company after all expenses, reinvestment, and debt are paid. FCFE is a measure of equity capital usage.

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F/S Items (INR Millions) Mar-20 Mar-21 Mar-22 Mar-23 Mar-24
Free Cash Flow to Firm 18406 16729 22853 28674 35398
Free Cash Flow to Equity 18825 17071 23776 29611 36458
FCFF and FCFE values: Asian Paints Stock

Step 4: Calculating the Terminal Value of Asian Paints Stock

Terminal value (TV) is the value of a business or project beyond the forecast period when future cash flows can be estimated.

It assumes that a business will grow at a set growth rate forever after the forecast period. Terminal value often comprises a large percentage of the total assessed value.

Terminal Value Calculation Units INR Millions
Free Cash Flow to Firm 35397.67
Growth Rate 5.00%
Cost of Capital 8.54%
Terminal Value 1226740.34
Terminal Value: Asian Paints Stock

Step 5: Calculating the Discount Rate

DCF analysis helps assess the viability of a project or investment by calculating the present value of expected future cash flows using a discount rate.

Here we use the Weighted average cost of capital (WACC) to discount the cash flow.

The below table from the excel model shows the calculation of WACC for Asian Paints Valuation.

WACC Calculation for Asian Paints Valuation.
WACC Calculation for Asian Paints Stock

Step 6: Discounting the Cashflows

The WACC and the Cost of Equity for the company calculated in the above step are then used to discount the FCFF, FCFE, and Terminal Value calculated in Steps 3 and 4.

In our case, we’ll only consider the FCFF based Intrinsic price of the shares as it represents the cash flow to all the suppliers of capital and not only to the equity shareholders.

Thus we arrive at the present value of future FCFF for Asian Paints Valuation. (Units are INR Millions)

PV of FCFF and FCFE  for Asian Paints Valuation.
PV of FCFF and FCFE for Asian Paints Stock.

Step 7: Arriving at the Intrinsic Value of Asian Paints Stock

Dividing the PV of the FCFF and Terminal Value (the value of the entire firm) by the number of outstanding shares we get the per-share intrinsic value.

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We can compare this price with the current market price of the stock to get the Discount or Premium to its intrinsic price.

Asian Paints Valuation Units
PV in INR Million 907354
No of Shares Outstanding (In Million) 959
Intrinsic Value 946.15
Current Market Price of Share 2290.00
Current Discount/Premium 142%
Intrinsic Value of the Shares: Asian Paints Valuation

Asian Paints Valuation and Intrinsic Share Price = INR 946.15

Download the Excel Model from Here!

References: Investopedia

(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)

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